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• TAO of Flipping and Investing in Real Estate - Part 4.5 - Determining a Rent Price

  Determining what you will charge in rent for your investments may sound very cut and dry but it is not.  The rent price will determine how fast you will get the home rented, whether your going to be making mortgage payments while it sits, and the type of renters that will be calling.  Being able to adjust your rent to coincide with your needs is not only important, but crucial to investing and overall cash flow.

  Although renting a home is primarily for long term investors, it pertains to flippers and short-term holding as well.  Knowing what your house will rent for will determine what people you can market  and sell it to.  If it is an expensive home and the rents cannot warrant the mortgage a buyer will make, you will be stuck with marketing it to homeowners and long-term investors.  If the homes rent is equal to or close to what the mortgage will most likely be (this includes taxes and insurance), the market is much wider - to include investors and potential home buyers.

  If you own a house in a sub-division where all the houses look alike, how will you stand out?  As much as renters like pretty flowers and a big back yard, that is not what will bring them to renting your homes.  You may have learned in economics that supply and demand drive prices, this is true in stocks and its true in real estate.  Having the ability to determine where to price your rental is crucial for this reason - if there is too much supply (too many rentals in the area) then there will be less demand and you will have trouble renting out your home.

  I have a bit of a different take on this theory, but it essentially still follows the same rule.  If you can buy for the right price, you should be able to rent for the lowest price thus beating the market.  What this means is that you not only need to buy your investments for a better price than most, but you need to be able to rent them for lower than everyone else!  By doing this you are essentially doing two things: assuring yourself of a more viable rental because you have a more enticing rent price than the other homes in the area and you have lowered your calculated risk because you have increased you chances of renting your units quicker.

  If there are 10 homes on the same block that you just bought in, all were about the same look and size, and everyone had their house listed for rent at 1000 dollars, which house would rent first?  The answer is not really known because they all are equally marketable due to price.  Having a hut tub in the back yard, or a larger game room is fine, but renters care more about price than those things.  Now, if you had bought a house on this same street but you had added in all your expenses and could rent your house for 900.00, you would be more likely to rent your house than the other 9 on the block.

  The importance of pricing is not to determine just how much cash flow you will make, although this is important - it’s to determine your ability to get renters to sign a lease!  If you can buy a house for the right price and have used the rents of other houses in that area to determine your purchase price, you were able to determine what you would be able to rent your house for.  You should be able to discount your rents by at least 15% of the retail market and still come out even.  If you cannot do this, you are not able to account for the risk involved in buying real estate and being successful.

  Lets say we came into a recession and those 10 houses were all vacant, they all have not been able to get a renter because the apartments nearby are slashing prices to take the renters away from your market - what do you do?  Well, if you did like I told you, you will be able to discount your house more than the others on your block because you have calculated your risk and were able to lower your rents to equal or lezs than your competitors at the apartments.  This is how you will be and stay successful in keeping your houses rented.

  Now that you understand why you need to be able to compete against others in your local area, lets move on to how to determine what to rent your investment for.  This is not as hard as it seems, although it does require some practice to be good at being able to set your rents right the first time. 

  The first thing you can do is drive the neighborhood and call the people that have signs in their yard.  You will be surprised at how much information you can attain by calling the owners.  Next you can look in your local papers and online for the houses that are in your neighborhood and call them as well.  Lastly, find a local realtor that know the area well and have them pull a list of all the houses in your area that are listed or have rented in the last 6 months, this is the best way to determine your starting rents, but is also tough as times because the realtor might be a bit apprehensive if you are only using them and may not work with you in the future.

  Once you have set your rent price, you will test the market.  First try setting it 3-5% above the market price and see if you get any callers, if not, you will start to lower it 3-5% at a time until you have people calling regularly about your rental.  Eventually, you will have a good grasp on the market area and will be able to immediately determine your rents and will take less time researching.  Always remember that whatever your rent will be, you need to be able to discount that by at least 15% in case there is a turn in the market and you need to start slashing prices to beat the competition.